If you have still not done tax planning for the current financial year, you need to move fast. With March 31 approaching, last minute hurry may lead to wrong decisions
WORDS: SANGEETA SINHA
Most of us start planning for investing in tax saving instruments at the last moment. As the financial year approaches closure end we rush to tax consultants. Sometimes in the rush we end up making wrong decisions and often miss out on smart investments. It is always a good idea to plan your investments a little early so that you have ample time to research and make wise decisions.
Another advantage of planning early is that it helps you in managing your finances as you can invest in a staggered manner. There are many schemes like Public Provident Fund (PPF) or National Pension System (NPS) which allow 12 transactions a year.
Often when we rush for last minute investments our focus simply remains on tax saving and in the process we miss out on other important aspects of investment. Ideally one needs to look for investment plans which offer maximum tax savings with minimum risk.
Section 80 C
Before we discuss some of the good tax saving plans, we need to understand section 80 C of Income Tax Act as most tax saving plans work as per this section. It allows deduction up to Rs 1.5 lakh.
Investments like ELSS (Equity Linked Saving Scheme),
Life Insurance, PPF, National Savings Certificate (NSC), bonds etc can be used to save tax under this section. The deduction you make towards these investments is tax deductible. It doesn’t matter if you invest in one or more of the above investments, the deduction will stop as soon as it reaches its limit of Rs 1.5 lakh.
Tax saving plans
There are several options and you need to devise your own plan based on your requirement and income. You will need to pick the plan which suits you.
ELSS – Specially designed for tax saving purposes, this equity based tax saving option has the advantage of a short term lock-in period of 3 years. The investment in an ELSS can also be made through a SIP (Systematic Investment Plan) wherein you invest a small fixed amount every month instead of paying a large amount altogether.
Being a market linked product they are high risk but also offer the potential of high returns. For tax purposes, returns from an ELSS are tax free; long-term capital gains from equity funds are exempt from tax. You can claim up to Rs. 1.5 lakh of your ELSS as a deduction from your gross total income in a financial year under Sec 80C of the Income Tax Act.
ULIP (Unit Linked Insurance Plan) – This investment product comes with life insurance as well. ULIPs offer tax benefits at the time of investment as well as on maturity and it also provides life cover to the person taking the policy.
Money invested in ULIP can be claimed as deduction. However it is important that you pay your premiums and keep your plan alive to avail tax benefits. If the ULIP is discontinued before 2 years, tax benefits u/s 80C will not be allowed. Any deduction allowed in the previous years will be added back to your income in the year in which ULIP is closed.
Tax free bonds - A bond is a fixed income instrument carrying a coupon rate of interest and is issued for a fixed tenure. As the name suggests, interest earned from tax-free bonds is exempt from tax.
PPF– A Long term saving scheme issued by the Central Government, this is good for investors who look for assured earnings. Under section 80C, the contribution made towards PPF is tax deductible and interest earned and received at the maturity is absolutely tax free.
With a lock-in period of 15 years this option may not be suitable for those looking for a short term tax-saving investment but the tax free status gives it a distinct advantage over fixed deposits. You can withdraw a certain amount from PPF after the fifth year without any prepayment penalty.
NSC – Similar to PPF, this is also risk-free with guaranteed returns and saves tax under section 80C. With NSC, no tax is deducted at source and it is the responsibility of the certificate holder to declare the income so that appropriate income tax can be calculated and charged. In case of bank FDs the tax that is due to be paid on the returns earned is deducted at source by the banks but needs declaration.
Life insurance premium – This comes with dual benefit; gives life cover plus the premium you pay on a life
insurance plan is deductible from your total income under section 80 C. The proceeds of a life insurance policy, whether the maturity amount or the sum assured, are exempt under Section 10(10D) of the Act.
NPS - It is one of the few tax saving investments options that let the investor surpass the Rs 1.5 lakh limit of deduction set by section 80C. The percentage of basic salary (up to a max of 10%) that your employer contributes towards your NPS is tax deductible. An additional Rs 50,000 can also be invested in NPS for tax deductions under Section 80CCD(1B).
One also needs to keep in mind that on maturity one has to compulsorily invest 40 per cent of the accumulated corpus in annuity which gets locked in for lifetime and is also entirely taxable. Some pension plans don’t have such restrictions; enquire and understand all the pros and cons before you invest.
Senior Citizens’ Saving Scheme (SCSS) - This offers regular income apart from giving tax benefits too. Anybody over 60 can invest in this government backed scheme. The tenure of the scheme is 5 years, which is extendable by another 3 with an investment limit of Rs 15 lakh and gives 8.6% per annum. Investment in SCSS qualifies for deduction under Section 80C of the Income-tax (I-T) Act.
Sukanya Samridhi Scheme (SSS) – This is a small deposit scheme for the girl child launched as a part of the ‘Beti Bachao Beti Padhao’ campaign. An SSS account can be opened any time after the birth of a girl till she turns 10, with a minimum deposit of Rs 1,000. The account has an annual cap of Rs 1.5 lakh and the interest is tax free.
The account can be opened for up to two daughters, but the combined limit is Rs 1.5 lakh in a year. Accounts can be opened in any post office or designated banks.
Payment of children’s tuition fees - The tuition fee paid for the education of two children is eligible for tax deduction under Section 80C of up to Rs 1.5 lakh. The fee can be paid to any school, college, university or educational institute situated in India. The fees have to be for a full-time course only.
Repayment of home loan - The repayment of the principal of a loan taken to buy or construct a residential property is eligible for tax deductions under Section 80C. This deduction is also applicable on stamp duty, registration fees and transfer expenses.
BEYOND SECTION 80 C – EXPERT ADVISE
We spoke to Binita Sengupta, a fellow member of the Institute of Chartered Accountants of India with over 17 years of professional experience in Audit, Income tax & Corporate Tax laws. She is currently practicing and providing consultancy services with special emphasis on Income tax, corporate matters and GST. She gives us insight on tax savings which can be done beyond section 80 C
Apart from section 80 C, certain other sections of income tax also allow you to save tax over and above the 80C limit of Rs 1.5 lakh.
Tax saving on house rent allowance – House rent allowance, commonly known as HRA, is a major chunk of a salaried individual’s total pay. Under Section 10 (13A) of the Income Tax Act, you can save tax on the rent you pay to your landlord. However, you get partial tax benefit on the rent you pay.
The amount that is allowed for exemption under HRA is calculated as the minimum of:
i) Rent paid annually minus 10 per cent of basic salary plus dearness allowance
ii) Actual HRA received
iii) 40 per cent of basic and dearness allowance (50 per cent in case of metro cities).
Your HRA allowance will be taxable if you are not paying any rent or you stay in your own house. But those who stay with their parents can also claim HRA benefits by paying rent to their parents.
Health Insurance – Premiums paid for health insurance for self, spouse, children, and parents qualify for deduction under Section 80D. One can claim deduction of Rs. 25,000, if he is below 60 years of age, and Rs. 30,000 if above 60, towards medical insurance premium paid for self, spouse and children.
Under this section, additional deduction of Rs. 25,000 is available if one buys medical insurance for parents. This deduction can go up to Rs. 30,000 per year if parents are above 60. So the total deduction you get under Section 80D is up to Rs 60,000. This is in addition to Rs. 1.5 lakh deductions you avail under Section 80C.
Medical allowance – Medical reimbursement is an arrangement under which employers reimburse the portion of the health expenses incurred by the employee.
The Income Tax act allows exemption of up to Rs.15,000 on medical reimbursements paid by employer.
Expenditure on the health of disabled person Section (80DD) - If a taxpayer has dependent parents, spouse, children or siblings who are differently-abled, then he can claim deductions up to Rs. 75,000 for expenses on their maintenance and medical treatment under this section. If the disability is severe in nature, then the deduction can increase to Rs 1.25 lakh.
Deduction under Section 80DDB - Under this section, one can claim deduction of Rs. 40,000 for medical treatment of specified disease or ailment for self and dependents. The deduction can go up to Rs. 60,000 if the taxpayer is above 60 and if he is above 80, then the deduction amount is up to Rs. 80,000. The diseases have been specified in Rule 11DD. To claim this benefit a certificate in form 10 I is to be furnished by the taxpayer from any registered doctor.
Deductions under Section 80CCD (1B) - Under this section, one can get tax benefits on investments up to Rs 50,000 in NPS tier 1 account. This is over and above the Rs 1.5 lakh limit under Section 80C. An individual in highest tax bracket can save Rs. 15,450 by investing Rs. 50,000 in NPS under Section 80CCD(1B).
Deduction under Section 80E - If you have taken an education loan for yourself, spouse or children, then the interest paid on the loan qualify for tax benefit under Section 80E. The best thing here is that there is no upper limit on the amount of deduction. But the criterion is that the loan must have been taken from a financial institution or approved charitable institution and for full-time higher education.
Deduction of interest on housing loan (Section 24B) – If you have taken a housing loan, then the interest you pay on it qualify for tax benefit under Section 24B. Interest paid up to Rs 2 lakh in a financial year on housing loan is allowed as deduction from your income. If you have taken a home improvement loan, then interest up to Rs 30,000 will be allowed as deduction under this section.
Deduction under Section 80EE – Reintroduced in Union Budget 2016, an additional deduction of Rs. 50,000 is available under this section, which is over and above the limit of Section
24B on interest paid on home loans if a person is buying a house for the first time.
But there are conditions to avail this benefit:
a) The cost of the property must be below Rs 50 lakh
b) The loan amount must be less than equal to Rs 35 lakh.
c) The property must be bought after April 1, 2016.
Donation to specified institutions (80GGA) – If you have donated to an institution carrying on scientific research or to a university or college which is approved by the government, then the amount contributed would be eligible for deduction under this section. The mode of payment cannot be cash; any mode other than cash can be claimed for deduction.
Donations to social causes: You are entitled to tax benefits under section 80 G if you make any donations for social cause. Make sure that the organisations you donate to are covered under this scheme.
In addition to the above, one must not miss out the dates of payment of TDS & advance Tax. TDS liability arising out of any payments made during a month is to be paid before the 7th of the following month.